Macroeconomic environment

• Dimensions of Nepalese economy

• Employment trends and labour market issues, labour migration on economic
imbalance
• Economic development plans
• Industry and agricultural sectors-performance
• Economic policies and reforms- industrial policy, privatization policy, trade policy,
tourism policy, and monetary policy
• Liberalization of the Nepalese economy and capital market reforms
• Factors contributing to competitive business environment in Nepal
• Constitutional arrangement for economic environment in Nepal.
 Introduction to Economic
Environment
The economic environment of a firm refers to the nature and direction
of the economy in which the firm competes or may compete. In general
firms seek to compete in relatively stable economy with strong growth
potential. The components of economic environment are;
• Economic Systems - Free Market Economy, Command Economy &
Mixed Economy
• Economic Structure – Primary Sector, Secondary Sector Tertiary Sector
• Economic Policies – Monetary Policy, Fiscal Policy, Industrial Policy
• Economic Condition – GDP, BOP Inflation rate etc.
• Economic Integration – Relation with international Organizations.
 Structure of Nepalese
Economy
Economic Structure refers to the composition of an economy. That can be divided in
three sectors.
• Primary sector refers the agriculture sector combined of agriculture, forest and
fisheries. It is estimated that the contribution of agriculture sector to the GDP of the
fiscal year 2022/23 will be 24.63 percent.
• Secondary sector, also called Industry sector includes manufacturing, mining,
construction, hydropower etc. are estimated to contribute 12.94 percent in fiscal
year 2022/23.
• Tertiary sector or Service sector which is the combination of accommodation and
food service, financial and insurance sector, health and social work sector,
entertainment sector technical sector, education sector, transport sector, wholesale
& retail sector, real estate sector etc. estimated to contributed 62.43 in fiscal year
2022/23.
Source Annual Report 2022/23, Nepal Rastra Bank
Sector wise Contribution in GDP of Nepal

Source Annual Report 2022/23, Nepal Rastra Bank

 Dimension of the economy
Dimensions of an economy refer to the faces of economy of a country. They
reflect the economic development of a country which is determined by several
factors. Some of them are; demographic forces, income level, income
distribution, growth of agricultural and industrial activities, development of
service sector, level of employment, balance of payments, rate of inflation,
urbanization, and globalization. These factors collectively determine the
soundness of an economy. The economic dimensions may be analyzed through
four facets or dimensions which are inter-related. These are;
1. Economic Dimension
2. Socio-Economic Dimension
3. Industrial & Agricultural Dimension
4. Economic Development Dimension
 1. Economic Dimension
The economic dimension indicates the economic performance of a country.
Economic performance may be classified into internal and external economic
performance.
• The internal economic performances includes gross domestic products, income distribution, poverty
level, personal consumption, saving, debt and credit availability, budget position (surplus/deficit),
inflation, interest rate, fiscal and monetary policies.
• The external economic performance is reflected by balance of payment, exchange rates, and foreign
trade volume.

The economic dimension indicates the purchasing power and pattern of

consumption of the people. The economic performance may be classified into
demand side performance and supply side performance.
• The demand side performance is reflected by per capita income and income distribution among the
population.
• The supply side performance includes saving, investment, productivity and capacity utilization.
 2. The Socio-Economic
Dimension
• The socio-economic dimension indicates the demographic
features which affect the economy directly or indirectly.
• It is composed of the quantity as well as other characteristics
of the people.
• The market for a business is determined by the number of
people as well as their purchasing pattern and capacity.
• The size, distribution, density, growth, age and gender mix,
urbanization, and migration of the population are some of the
important socio-economic factors that affect business decisions.
 3. The Industrial and Agricultural dimension

• Industry is related to production of goods and services.

It is the secondary sector of Nepalese economy.
• On the other hand, agriculture is the primary sector of
the economy.
• It uses the natural resources directly.
• The industrial and agricultural dimension of an economy
reflects the potentials to supply goods and service to the
consumers and raw material to industrial units.
 4. The economic development dimension

• The pattern of economic development of a country

largely depends on the system of national planning.
• The direction and priority of the development of
different sectors are reflected by the development
plans.
• They also portray the development policies and
strategies along with the allocation of resources in
different sectors of the economy.
Economic Dimension/ Indicators
• 1. National Income - National income may be defined as the
total income of a nation at a particular period of time.
• In other words, it refers to the sum of earnings by the factors of
production in the form of wages, rent, interest, and profits.
• More simply, national income reflects the sum of all kinds of
factors rewards or personal income.
• It depicts the combine contribution of all economic resources like
natural resources, human resources and physical resources.
Economic Dimension/ Indicators
• Gross Domestic Products- Gross Domestic Product (GDP) is the monetary value
of all final goods and services produced within a nation over a specific period of
time.
• It is one of the main indicators used to measure the performance of a country's
economy.
• GDP is measured in terms of its size and growth rate.
• The GDP growth rate is the most important indicator of economic health of a
country. When the GDP growth is strong, employment and wage rate increase as
companies demand labour to meet the growing economy.
• They also have higher confidence to invest more when GDP growth is strong. GDP
growth affects the profitability of companies eventually determining the stock
price.
Economic Dimension/ Indicators
• Gross National Products- GNP is a broad measure of a nation's
total economic activity.
• It is the value of all finished goods and services produced in a country
in one year by its nationals both inside and outside the country.
• It is Gross Domestic Product (GDP) plus net factor income from
abroad.
• Net factor income from abroad is the difference between the factor
incomes earned by the residents from foreign countries and the factor
incomes earned by foreigners in the country.
 Economic Dimension/ Indicators
• GDP per Capita Income- GDP per capita income is a country's economic output per person.
• More simply, it is the average net income per person. It is calculated dividing a country's GDP by
its total population.
• Income Distribution- Income distribution refers to the distribution of the total GDP/GNP of a
country amongst its population.
• In other words, it is the extent to which income is distributed in an uneven manner among a
population.
• Per capita income is often measured by calculating how much income is earned by different
segments of the population.
• If everyone earns exactly the same amount of money, then the income distribution is perfectly
equal. If no one earns any money except for one person, who earns all of the money, then the
income distribution is perfectly unequal.
• Usually, a society's income distribution falls somewhere in the middle between equal and unequal.
 Economic Dimension/ Indicators
• Exchange Rate: An exchange rate (also known as a foreign-exchange rate-FOREX rate) is the rate between
two currencies at which one is exchanged for another.
• Hence, it is also regarded as the value of one country's currency in terms of another currency.
• There are two systems of exchange rate.
• In the Fixed Exchange Rate, also called a pegged exchange rate, a currency's value is fixed against either
the value of another single currency, to a basket of other currencies, or to another measure of value, such as
gold.
• In the Floating Exchange Rate system, the currency price is set by the FOREX market based on supply and
demand compared with other currencies. This is in contrast to the fixed exchange rate, in which the
government predominantly determines the rate. In Nepal, the fixed exchange rate has been adopted.
• The exchange rate plays an important role for firms that export goods and import raw materials.
• Depreciation (devaluation) of the domestic currency makes exports cheaper; as such the exporting firms are
benefitted.
• However, firms importing raw materials faces higher costs of imports.
• On contrary, an appreciation makes exports more expensive and reduces the competitiveness of exporting
firms. However, imports of raw materials (e.g. oil) become cheaper.
 Economic Dimension/ Indicators
• Unemployment Rate: The unemployment rate measures the number
of people looking for work as a percentage of the total labour force.
• A lower unemployment rate depicts the economic soundness of a
country.
• When unemployment rates are high, consumers have less money to
spend affecting the economy adversely.
• Unemployment may be favorable for the business firms due to lower
wage costs and larger pool of labour.
• The unfavorable side is there will be less demand for goods and
services affecting their turnover and profitability.
 Economic Dimension/ Indicators
• Inflation (CPI): The consumer price index (CPI) reflects the cost of living, or
inflation.
• It is calculated by measuring the costs of essential goods and services. It is the
average increased cost of the total basket of goods or services over a period of time.
• Firms generally prefer inflation to be low and stable.
• If inflation is high, firms may see a rise in costs and uncertainty. Unexpected
inflation may lead to the necessity of renegotiating wage deals with workers.
• If inflation is higher than expected, then the costs of investing will be changing
frequently which makes firms less willing to invest because they are uncertain over
future costs, wages and future demand. There is advantage of inflation too. It
reduces value of debt.
 Economic Dimension/ Indicators
Poverty: Poverty may be defined as inability to attain a minimum standard of
living.
• It refers to the condition of the people who are not able to meet the basic
necessities such as food, health, education, and shelter. Poverty leads to
unavailability of skilled labour.
• It also results in low employee productivity due to lack of proper training and
education.
• It reduces the demand of products and services. It is also a source of many
crimes. All these affect the business sector adversely.
• Over the years, the poverty rate in Nepal is decreasing due to increase in
employment opportunities, social security and protection programs, provision
of economic loans and inflow of remittance.
 Economic Dimension/ Indicators
Interest Rate: An interest rate is the amount that a lender charges to
individual or business on lending.
• Banks or other financial institutions are the source of debt financing for the
business.
• Higher interest rates result in higher total business expenses. It can also
reduce consumer spending, because high rates make it more expensive for
consumers to take loans from financial institutions for their spending.
Credit Availability: Credit availability is the access of the business sectors
in credit.
• Higher savings by the people in the financial institutions results in easy
credit availability at favorable terms and conditions to businesses.
 Economic Dimension/ Indicators
Business Cycle: Business cycle is the fluctuations in aggregate economic activities such as
output, employment, and demand. It directly affects the operation of a business firm. The
business cycle has four phases.
1. Depression: In this phase, all the economic activities are far below the normal rate of
growth. The prices of goods and services at this phase decrease. Hence, business
activities are slowed down. The investors are reluctant to invest.
2. Recovery: In this phase, the economic activities slowly improve. This phase is
characterized by increase in output as well as price level. Hence, the investors are
optimistic at this phase. Nepalese economy is currently in this phase.
3. Prosperity: In this phase, all the economic variables increase rapidly. It leads to increase
in demand, price as well as profitability. The rate of business activities increases.
4. Recession: This phase is characterized by fall in output, income, price level, demand,
and profit. Hence, business activities are severely affected.
 Economic Dimension/ Indicators
Taxes: Taxes have direct effect on businesses. Taxes increase the price of
their products. This may affect the sales leading to decrease of profit. If
the tax rate is low, the stock prices tend to be high due to higher profit.
Monetary policy is a macroeconomic policy. It is concerned with
monetary system of a country. It is formulated and implemented by the
central bank.
• It involves management of money supply and interest rate. Monetary
policy is used by the government of a country to achieve macroeconomic
objectives like price stability, economic growth, balance of payment
stability, and full employment.
• A liberal monetary policy helps to exploit several business opportunities.
 Economic Dimension/ Indicators
Fiscal policy: Fiscal policy determines a country's economic
direction.
• It is related to the levels of taxation and government spending in
order to influence the aggregate demand and the level of economic
activity.
• Government uses fiscal policy to influence the economy by
adjusting revenue and spending levels.
• Fiscal policy influences inflation, employment and the flow of
money by increasing or decreasing revenue (taxes) and
expenditures (spending). An expansionary fiscal policy stimulates
the economy creating business opportunities.
 Economic Dimension/ Indicators
Human Development Index: The Human Development Index (HDI) is a statistical tool used to
measure a country's social and economic dimensions which are based on the health of people, their
level of education attainment and their standard of living.
• It emphasizes more on richness and happiness of human lives than on economic prosperity.
• The HDI is a summary measure of average achievement in key dimensions of human development.
• The health dimension is assessed by life expectancy at birth
• The education dimension is measured by mean of years of schooling for adults aged 25 years and more and
expected years of schooling for children of school entering age.
• The standard of living dimension is measured by gross national income per capita.
• The United Nations Development Program (UNDP) classifies country into one of three
development groups.
• Low human development for HDI scores between 0.0 and 0.5
• Medium human development for HDI scores between 0.5 and 0.8
• High human development for HDI scores between 0.8 and 1.0
 The Socio-Economic
Dimension/Indicators
• Population is the most influencing socio-economic element that affects
business firms.
• Higher population of a country reflects the business potentiality. However, it is
not the sole indicator.
• It should be analyzed together with other elements. For example, a country
with lower population may be more economically stronger than the country
with higher population.
• The total population of Nepal, is 29,164,578 according to the census of 2021, of
which the number of males is 14,253,551 (48.87 %) and the number of females
is 14,911,027 (51.13 %). Accordingly, the sex ratio is 95.59 males per 100
females. The total population was 26,494,504 with sex ratio of 94.16 males per
100 females in 2011
 The Socio-Economic
Dimension/Indicators
• Population density is the number of people per unit of area, usually quoted per
square kilometer. It shows the pattern of the population living in different areas. Some
places are sparsely populated and others are densely populated.
• The population density (number of people per square kilometer of area) is 198 in 2021,
which was 180 in 2011. By ecological belt, the highest population density is 460 in the
Tarai region and the lowest is 34 in the Mountain region. The highest population
density is in Kathmandu district (5,169) and thelowest in Manang district (3).
• As per the 2021 census, 53.61 percent (15,634,006 persons) of the total population live
in the Tarai region, 40.31 percent (11,757,624 persons) in the Hill and 6.08 percent
(1,772,948 persons) in the Mountain region. The population was 50.27 percent
(13,318,705 persons) in the Tarai region, 43.01 percent (11,394,007 persons) in the
Hill and 6.73 percent (1,781,792 persons) in the Mountain region in the 2011 Census.
 The Socio-Economic
Dimension/Indicators
• Employment Trend : With the increase in cost of living and desire of better facilities, people
see for employment.
• It is the main source of livelihood for people. Employment condition is one of the indicators of
economic development of a country.
• Over the years, a significant shift in employment trend may be noticed in Nepal.
• Labour force in Nepal is also gradually shifting from agricultural sector to other sectors
mainly in service sectors. This has a large implication in both social as well as economic
development of the country.
• The employment trend in Nepal may be discussed under the following headings.
1. Rural migration: People are moving from rural to urban areas in search of new and better
employment. Urban areas provide big market where people can sell their skill. People can
also engage in different industries.
2. Increase in foreign employment: In recent years, there is significant increase in foreign
employment. People move to different countries where they get good earning. Foreign
countries demand labour force from Nepal which opens door for foreign employment.
Remittance from foreign countries is one of the major contributors of Nepalese GNP.
 The Socio-Economic
Dimension/Indicators
3. Increase in skilled manpower: With the increase in level of education, people desire
jobs that match their qualification. Training and education build skilled human resource,
and there is a high demand of technical manpower in industrial and service sector.
4. New employment opportunities: Economic development of the country has also
provided new opportunities for the people. Construction and renovation activities have
provided job opportunities for local people.
5. Shift from traditional occupations: People are also gradually shifting from traditional
occupation to new job opportunities. They are giving up informal farming and old family
business like cottage and small industries and moving to new and modern businesses.
6. Fair treatment: Nepalese organizations today consist of diverse workforce. People with
different religion, cast, culture, race, and skill work in an organization. It is also very
important that the organizations treat their employees equally and provide a fair
treatment. Workers should be provided with growth and opportunities with equal rights.
 The Socio-Economic
Dimension/Indicators
Labour market is a market where workers seeking jobs and employers interact each other. More simply, it refers to the
supply and demand for labour. In labour market, the employers compete each other to hire talented workers. The labour
market determines the allocation of labour and its costs. t is one of the important aspects of national economy. There
are many issues governing labour market in Nepal. Such issues may be highlighted through the following points (Nepal
Labour ForceSurvey, 2017/18).
1. Employment dominated by agriculture sector: In Nepal, employment is dominated by informal sector. One in
every five people who had jobs in Nepal, were employed in agriculture, the biggest employing industry. Trade
industry had the second largest share of employment (17.5 percent), followed by construction (13.8 percent). The
informal sector had a bigger share of 62.2 percent.
2. Higher number of women in the labour force: Nepal had a population of 29 million at the time of the survey of
which 53.5 percent were females. The working age population (15+ years) had a share of 71.5 percent (20.7 million)
of the total population of which 55.6 percent were females. The higher number of women in the labour force is
partly a reflection of migration abroad, which is predominantly undertaken by men.
3. High unemployment: There were approximately 20.7 million people of the working age and approximately 7.1
million were employed while 908 thousand were unemployed. This translated into unemployment rate of 11.4
percent. Females reported a higher unemployment rate of 13.1 percent, which is 2.8 percentage points higher
compared to males.
 The Socio-Economic
Dimension/Indicators
4. Disparity between genders: In Nepalese labour market, a wide disparity in earning
between male and female may be noticed. Nepalese employees earned an average (mean)
of Rs.17,809 per month. However, gender disparities were obvious in the mean monthly
earnings gap between males and females. The average wage of a man is Rs17,809 per
month while it is Rs13,630 per month for a woman. This shows that a male worker earns
Rs5,834 per month (30 percent) more compared to a female worker. The survey also
reveals that females had a share of only 13.2 percent in managerial position compared to
86.8 percent of males.
5. Child labour: Approximately seven million children aged between 5 and 17 years,
approximately; 286 thousand were involved in work for pay, 2.1 million (29.6 percent) were
involved in at least one activity related to producing goods for own final use, 36.3 percent
of children were involved in at least one activity related to providing a service for own final
use during the reference period (seven days prior to the interviews). Involvement in these
activities was more prevalent among girls (51 percent) than among boys (22.4 percent).
The burden of housework fell mainly on girls; 47.5 percent of girls were involved in
 The Socio-Economic
Dimension/Indicators
6. Forced labour: The results of the survey suggest that currently 31,338 individuals
are in forced labour in Nepal.
• These individuals are on average in forced labour for 2.6 out of the last 5 years and
are predominately male (56 percent). Among those, it is estimated that 17 percent
are children.
• Forced labour is more prevalent in agriculture and forestry (44 percent), followed by
construction (16 percent).
7. Increase in labour force participation rate: The labour force participation rate
measures the proportion of a country's working age population that engages actively
in the labour market, either by working or looking for work. According to the World
Bank, Nepal's labour force participation rate increased to 83.8 % in December 2019,
compared with 83.7% in the previous year.
 The Socio-Economic
Dimension/Indicators
Migration and Foreign Employment: Migration is the movement of a person or group
of people to settle in another place.
• Migration can be both internal or external, temporal or permanent and voluntary of
forced.
• Migration is a major component of population change. People migrate for several
purposes that may be for security, education, employment, and better facilities.
• There is a high tendency of migration in Nepal. People living in Himalayan and Hilly
region migrate to Terai in search of better opportunities and living standard.
• Similarly people migrate to big cities like Kathmandu, Pokhara, and Biratnagar where
people feel there are abundance of opportunities.
• A significant proportion of the population from Nepal migrates abroad for foreign
employment every year and remittances contributed approximately 25 percent of the
country's Gross Domestic Products during the last 10 years.
 Industrial & agricultural
Dimensions
• Nepal is a least developed country. The government has set an ambitious goal of uplifting it
from the least developed country to developing country by 2022. This requires a rapid
economic development in the country and the role of industrial sector is prominent in this
regard
• The history of modern industrialization in Nepal was started in 1936 with the establishment of
Biratnagar Jute Mill. After this Morang Cotton Mill (1941), Morang Sugar Factory (1946),
Raghupati Jute Mill (1946), Juddha Match Factory (1946) were other industries in Nepal.
• After the establishment of democracy in 1950 and adoption of the concept of planned
economic development, the pace of industrial development is found to be accelerated in
Nepal.
• Industrial sector plays pivotal role in reducing trade deficit by transforming import based
economy to production and export oriented economy. Industrial sector in Nepal has helped to
utilize local resources, means and technologies, make goods and services available and create
employment opportunities.
 Industrial & agricultural
Dimensions
• Structure of Nepalese Industrial Sector
1. Classification based on Nature of output and service
a) Energy-based industries: Industries generating energy from water resources, wind, solar, coal, natural oil, gas, bio-gas or any
other sources.
b) Manufacturing industries: Industries which produce goods by utilizing or processing raw materials, semi-processed materials, by-
products or waste products or any other goods.
c) Agro and forest based industries: Industries mainly based on agriculture or forest products such as integrated sericulture and
silk production, horticulture and fruit processing, animal husbandry, and forestry related businesses such as leasehold forests, and
agro-forestry.
d) Mineral industries: Industries involved in mineral excavation or processing thereof.
e) Infrastructure industries: Industries involved in road, bridge, ropeway, railway, trolley bus, tunnel, flying bridge and industrial,
commercial and residential complex construction and operation.
f) Tourism industries: Businesses related to tourist lodging, motel, hotel, restaurant, resort, travel agency, gliding, water rafting,
cable car complex, pony-trekking, trekking, hot air ballooning, parasailing, golf-course, polo, and horse-riding.
g) Telecommunication and broadcasting industries: Industries involved in providing information, knowledge and communication
services by using different technologies
h) Service industries: Workshop, printing press, consultancy service, cinematography, construction business, public transportation
business, photography, hospital, nursing home, educational and training institution, laboratory, air services, cold storage, etc.
 Industrial & agricultural
Dimensions
• Structure of Nepalese Industrial Sector
2. Classification based on Investment
a) Micro industries: Industries with fixed asset of Rs. 2 million except land and building, annual
transactions less than Rs. 10 million and workforce upto 9 people including the owner.
b) Cottage industries: Industries utilizing specific skill or local raw materials and resources,
and labour intensive and related with national tradition, art and culture are cottage industries.
c) Small industries: Industries with a fixed asset of up to an amount of one hundred fifty million
rupees.
d) Medium industries: Industries with a fixed asset between one hundred fifty million rupees
and five hundred million rupees.
e) Large industries: Industries with a fixed asset of more than five hundred million rupees..
 Industrial District & SEZ
• Establishment of industrial estates in Nepal is an attempt of the government to enhance the
pace of industrial development by establishing industrial clusters. The central idea behind
industrial estates is to provide industrial infrastructures at a certain point or area and
encourage the private sector to establish industries in such area.
• Government of Nepal has adopted the concept of Special Economic Zone (SEZ) to attract
foreign and national investors to invest and establish industrial and business units, which
contribute in increased promotion of export. SEZ is a geographical region that has economic
laws more liberal than a country's typical economic laws. Usually the goal is promotion of
foreign investment.
• SEZ Act, 2016 has come into effect for the establishment, operation and management of SEZ.
With objective managing SEZ, developing infrastructure and monitoring the established
industries and render services to such industries using one door policy, SEZ Corporation has
been established. The industries in SEZ are needed to produce goods of international standard
of which at least 70 percent has to be exported.
 Objectives of Special
1. To
Economic Zone
develop competitive capacity of export oriented
goods and services in the international market.
2. To attract Foreign Direct Investment (FDI)
3. To attract domestic and foreign capital and advanced
state of-the art technology by providing appropriate
facility for the industry through one door.
4. To widen the export trade all over the world
 Privileges received by
industries in SEZ
1. Special treatment for goods or services produced in SEZ
2. No nationalization of the industries.
3. Discount on the lease or rent of land or building.
4. Exemption from income taxes, value added taxes, excise duty,
customs duty and local taxes
5. Selling of raw materials or products to any industries in SEZ by any
other industries will be deemed as export and such industries can
enjoy facilities available for export.
6. Repatriation of foreign investment.
7. Relaxation in visa provisions.
8. Use of bonded warehouse.
 Export & Import oriented
Industries
• Export- oriented Industries
1. Carpet industry:
• Carpet industry is one of the major export oriented industries in Nepal.
• Nepalese carpet is well known for its quality and image both at the country
as well as abroad. It has been as area of employment generation and foreign
currency earning.
• The export of Nepalese Carpet has spread over 40 countries out of which,
Germany, USA, Belgium, Britain, Turkey, Switzerland, Japan, Spain, Canada
and Italy are the leading export markets.
• Among these too, the first two are the biggest export markets. Germany
alone absorbs more than 45% of the total carpet export.
 Export & Import oriented Industries

2. Garment industry:
• Garment industry in Nepal is one of the major sectors for foreign exchange earnings and
contributing employment opportunities. The major export market of Nepalese garments are USA,
Canada, Germany, France, Netherlands, UK, Switzerland Spain, Italy, Australia, India, etc.
3. Pashmina industry:
• Pashmina industry is another sector of foreign currency earning and employment generation in
Nepal.
• The number of international export markets of Nepali Pashmina products exceeds 40 out of which,
USA, Italy, Canada, UK, France, Japan, Germany and India are the major ones.
4. Leather and leather products:
• Leather is one of the major exportable items from Nepal. Nepalese leather goods are exported
currently to more than 20 countries out of which, Canada, Japan, USA, Italy, U.K., Israel and France
are the leading international buyers.
 Export & Import oriented
Industries
5. Handicraft industry:
• Handicraft is another important export oriented industry in Nepal to contribute to
national economy through foreign exchange earnings and employment generation.
• USA (which alone absorbs around 25% of the total export of handicraft products),
Britain, India, Canada, Germany, Japan, Italy, France, Australia, Netherlands and
China are its major foreign buyers.
6. Others: The other export items are;
• Gold and Silver Jewellery, Cardamom, Ginger, Precious and Semi-Precious
Stones, Pulses, Noodle, pasta and like Spices , Floricultural Products Medicinal
Herbs and Essential Oils
• Tea and Coffee , Honey , Paper and Paper Products
 Import substituting industries
1. Pharmaceutical industry: The major imports of pharmaceutical items are from
India, USA, Australia, UK and Japan. Nepalese pharmaceutical industries meet
around 30 percent of the current demand.
2. Electrical and electronic industry: The consumptions of electrical and electronic
item are growing in the country. These industries are mostly engaged in making
electronic items such as wire, switch, board and assembly of computer,
refrigerator, and TV.
3. Other imports substitution industries: The following are some other imports
substituting industries in Nepal:
• Cement industry
• Paper industry
• Sugar industry
• Iron industry
 The Role of industry in the changing
scenario
• After the government adopted the policy of liberalization, the level of competition in Nepalese market has been
increasing rapidly.
• With the entry of multinational with high levels of technology and managerial expertise, the domestic industries are
in high pressures to offer products with value and withstand the competitive pressures.
• With liberalization, the public enterprises almost enjoying monopoly in the market are under severe pressure.
Due to liberalization, the number of business firms in Nepal has increased tremendously.
• Nepalese customers are optioned with products from all over the world. In such a situation, quality has become the
prime concern of the Nepalese industries.
• They are required to have a close look to the domestic as well as global business environment and prepare
themselves accordingly. They are required to be learning entities to grow and sustain over a long period of time.
• Supports of the government and other social groups also very important. Nepalese industries are required to be
innovative to sustain in the market.
• Nepal must develop mechanism and procedures to be benefited from the global and regional organizations
such as the WTO, SAFTA and BIMSTEC.
• The private sector in Nepal should work closely with the government to explore potential products and
markets of competitive advantage. Joint efforts between them are important to maximize the benefits from
Nepalese hydro, agriculture, tourism, and cheap manpower.
 Constraints / issues of industrial
sector in Nepal
1. Political instability
2. Government policy and regulations
3. Lack of energy
4. Lack of security
5. Quality of product
6. Weak technology
7. Low capacity utilization
8. Lack of physical infrastructures
9. Labour regulations and labour unions
 Economic Development Dimension

• Economic development plans aim to achieve the economic

goals of the country through proper policies and resources
mobilization.
• They provide comprehensive overview of the economy, set
policy directions, identify strategies, programs and projects to
develop the economy.
• The planned economic development in Nepal started in 1955
with the establishment of Planning Board.
• From the inception of the first five years plan in 1956, Nepal is
just starting 16th Five Years Plan (2024/25 to 2028/29).
 Economic Development Plans of
Nepal
• Fifteenth Five Year Plan (FY 2019/20 to 2023/24)
• National Planning Commission- the apex body responsible for formulating the
country's development plan unveiled the 15th five-year plan (FY 2019-20 to 2023-
24) based on the vision Healthy, productive, responsible, and happy
citizens.
• The plan has set a target to achieve a minimum average economic growth of 10.3
percent per annum in the next five years.
• The government has come into operation with a five-year periodic plan after 12
years. The government had last introduced a five-year periodic plan in 2001,
which lasted till 2006.
• The periodic plan projects that the country's agriculture, industrial and
service sectors will grow an average growth of 5.6 percent, 17.1 percent
and 9.9 percent growths per annum respectively.
• The contribution of the services sector in the gross domestic product (GDP) can
reach 57.6 percent by fiscal 2023-24 followed by agriculture sector and industrial
sector by 22.1 percent and 20.3 percent, respectively.
Economic Development Plans of
Nepal
Objectives of Fifteenth Five Year Plan (FY 2019/20 to
2023/24)
Economic Development Plans of
Nepal
National Strategies of Fifteenth Five Year Plan (FY 2019/20 to 2023/24)
1. Achieve speedy, sustainable and employment oriented economic growth
2. Ensure accessible and qualitative health services and education
3. Development of internally and internationally interconnected and sustainable
city and villages
4. Enhancement of production and productivity
5. Provide complete, sustainable and productive social security and preservation
6. Creation of just society with poverty eradication and socio-economic equality
7. Protection, mobilization and uplift of natural resources
8. Improvement in public services, promotion of provincial balance and national
unity
 Sustainable development Goals(SDG)
• Sustainable development is defined as development that meets
the needs of the present without compromising the ability of
future generations to meet their own needs.
• It calls for concerted efforts towards building an inclusive,
sustainable and resilient future for people and planet. It is crucial
to harmonize three core elements: economic growth, social
inclusion and environmental protection to achieve sustainable
development.
• The United Nations General Assembly had declared the SDGs in
September 2015 with the commitment of transforming the world
between 2016 and 2030 and leaving no one behind in all
dimensions of development.
 Sustainable development Goals(SDG)
• According to the declaration, 17 goals, 169 quantitative goals, and 232 universal
indicators have been determined. These goals are integrated, inseparable, and
maintain balance among economic, social, and environmental dimensions of
sustainable development.
• SDGs aim at ending poverty, saving earth, ensuring prosperity and human rights
for all together with gender equality and women empowerment.
• The Millennium Development Goals (MDGs) were scaled-up to the Sustainable
Development Goals (SDGs) in 2015. Nepal, as a member state of the United
Nations, is fully committed to this global initiative. Nepal had started
internalizing the SDGs since the launch of the Fourteenth plan by implementing
it in accordance with the country’s economic, social, and environmental
contexts.
 Efforts to achieve SDGs
• Budgetary allocation has been ensured from FY 2016/17 by specifically making target-wide
budgetary allocation while explaining the expected support of such allocation to each component
of SDG.
• A six-member Central Steering Committee has been formed in coordination of Honorable Prime
Minister and Chairperson of National Planning Commission with a view to make the coordination
and implementation of SDGs effective and organized.
• Nine Thematic Working Committees have been formed in coordination of the member of National
Planning Commission with representatives from concerned ministries and private sector
organizations/institutions for fine-tuning and effective implementation of SDGs.
• Nepal has made significant progress in poverty reduction and human development in the last two
decades. The percentage of people living below the national poverty line dropped from 38 percent
in 2000 to 21.6 percent in 2015. The Human Development Index score improved by one
percentage point per year. Nepal aspires to become a middle-income country by 2030. Nepal
started implementing the SDGs in 2016 to achieve the national goals with the aspiration that “No
one is left behind while eradicating poverty and promoting prosperity.”
 Major Problems and Challenges
Facing Nepalese Economy
1. Achieving sustainable and broad based growth: It is a challenging
task to graduate the country at the middle income status by 2030 and
achieve the sustainable development goals by ending poverty, inequality,
unemployment and dependency through high, sustained and broad-based
inclusive growth.
2. Development of socialist economy: It is a daunting challenge to
develop a socialistic oriented economy as envisioned in the constitution
through formulation and implementation of economic policy including the
optimum utilization and management of the means of production along
with their distribution and redistribution for a robust and sustained
economic growth.
 Major Problems and Challenges
Facing Nepalese Economy
3. Resource management: There is a challenging task of economic development
including macroeconomic stability by creating the foundation for the mobilization of
resources as well as the availability, assurance and equitable distribution of the means and
resources at the federal, provincial and local levels in line with federal governance system.
4. Industrial development: There remains a challenge of increasing domestic
production through industrial infrastructure, decent labor relation, energy availability and
the production of quality products. Likewise, creating investment friendly environment for
increasing the production of goods and services having competitive and comparative
advantage as well as for increasing the domestic and foreign investment is also a daunting
task.
5. Employment opportunity: It is a challenging task to reduce dependency on foreign
employment by creating employment opportunities at home and reaping demographic
dividend by developing human resources as per the national needs and demand.
 Major Problems and Challenges
Facing Nepalese Economy
6. Energy management: Ending load shedding permanently by building large hydro projects or
reservoir based hydroelectricity projects to reduce investment and production risks on hydroelectricity that
may emanate from the climate change remains a challenge.

7. Concentration of investment: It is a challenge to achieve high and sustained economic growth

by concentrating investment on the key drivers of growth: agriculture, tourism, hydroelectricity and
infrastructure.

8. Development of agriculture: Modernization and commercialization of agriculture by increasing

production and productivity through an adequate arrangement of agricultural inputs such as improved seeds,
fertilizers, irrigation, agricultural credit, technology, and skilled human resource is a challenging task.

9. Use of land: Formulating strategies and work plans of scientific land-use policy and managing land
effectively by resolving problems. of uncontrolled land use and encroachment of public land have been
daunting tasks.

10.Development of infrastructure: There remains a challenge of developing infrastructure at

federal, provincial and local level as per the federal structure. Likewise, interlinking the centers of local level
and linking these centers with provinces and federation is also a challenge.
 Major Problems and Challenges
Facing Nepalese Economy
11.Reconstruction works: Timely completion of reconstruction works by ensuring budget
for the development of modern settlement and the reconstruction of earthquake damaged
private buildings, schools, health post, public buildings, cultural heritages and, physical and
social infrastructures has been a challenge.
12.Increase investment bearing capacity: It is challenging to increase investment
bearing capacity in line with sustainable fiscal structure and resource mobilization for the
implementation of state policies and fundamental rights envisioned in the constitution.
13.Enhance federal finance: It is a challenging task to enhance federal finance by
developing the revenue system as per the federal structure and increasing the ratio of tax
revenue to GDP through the development of a neutral and transparent tax system as well as
voluntary compliance of tax.
14.Reduce dependency on foreign aid: Reducing dependency on foreign aid for
country's development finance by enhancing the development capacity and utilizing foreign
aid for national benefit and priority sectors is a challenging task.
 Major Problems and Challenges
Facing Nepalese Economy
15.Control inflation: There remains a challenge of containing inflation rate within desired limit
by effectively managing supply through market monitoring and price information system as well
as managing the storage and distribution system of all the goods including petroleum products.
16.Promotion of social security: Tasks of carrying out social security programs in an
integrated way, mobilizing funds in line with investment plans in a coordinated way, and taking
grant-based social security programs to the target groups are full of challenges.
17.Expansion of formal economy: Creating dynamism in the economy by expanding the
size of formal economy through enhancing the access to finance is also a challenging task.
Likewise, it is challenging to make a provision of at least a bank branch in 744 centers at local
level established in the federal system and implement access to finance programs based on
innovative financial technology and financial literacy.
18.Achieve balanced development: There is a challenge to achieve balanced and inclusive
development by addressing geographically between village and towns, mountains, hills and terai
as well as on the basis of castes, groups and genders.
 Economic Policies
• Industrial Policy, 2010 Attempts to cope with the challenges
posed by globalization, address the increasing roles of service
industries in the economy of the country, involvement of
private sector in building physical infrastructures and human
resources
• Vision- To make remarkable contribution in national economy
through sustainable and broad-based industrial development
in an effective, coordinated and collaborative partnership of
public, private and cooperative sectors thereby to support
poverty alleviation.
 Industrial Policy, 2010
• Main Objectives:
1. To increase export of industrial products along with growth in national income and
employment through enhancement of quality and competitive industrial products and
productivity;
2. To increase contribution of industrial sector in the balanced national and regional
development by mobilizing local resources, raw materials, skills and means;
3. To establish industrial entrepreneurship as a sustainable and reliable sector by
utilizing latest technology and environment friendly production process;
4. To create strong basis of investment having developed productive human resources
and managerial capacity required for industrial development thereby establish Nepal
as an attractive place for investment in the South Asian region and in the world as
well by;
5. To protect industrial intellectual property rights.
 Industrial Policy, 2010
1. Priority to develop or acquire new technology to enhance competitive capacity, quality and
productivity of industrial products and services.
2. Follow the no pay for no work principle as provided by the labour law with a view to enhance
productivity and strengthen industrial relationship as a strong basis of industrial development.
3. Additional facilities and concession as incentives to export-oriented industries, industries
established in Special Economic Zone (SEZ), prioritized industries and industries established in
least developed, undeveloped and under developed regions.
4. Special emphasis to promote the industries that use local resources, raw materials, skills, labour
and technology.
5. Identification and utilization of the areas of comparative advantage to make the industrial base
strong and sustainable.
6. Technical and financial assistance to the industries that use environment-friendly and energy
saving technology on their own costs.
7. Special measures to promote green industries and to make the established industries pollution
free and zero to carbon emission.
 Industrial Policy, 2010
8. Capacity enhancement activities for development of industrial skills and entrepreneurship and
sound industrial management to create self-employment opportunities.
9. Reform in macro-economic policies, revenue policy, local tax and other sectoral policies.
10. Adherence with multilateral and regional agreements. Formation of industrial security force for
strengthening industrial security.
11. Encouragement to the non-resident Nepalese to invest in Nepal. Institutional arrangement of
institutions like Investment Board, One Stop Service Centre, Industrial Promotion Board, Industrial
District Management Authority, Industrial Human Resources Development Institution and Nepal
Business Forum.
12. Protection of industrial intellectual property rights to encourage the use of intellectual property,
13. Institutional structure and infrastructures along with necessary legal provisions to support,
promote, develop and expand micro enterprises, cottage and small industries.
14. Special provisions for production and market promotion of the products of micro enterprises,
cottage and small industries.
 Concept of Privatization
• Privatization is the process of transferring of ownership, property or business
from the government to the private sector.
• Privatization of public enterprises is one of the important aspects of
economic liberalization in Nepal.
• Its main goals are enhancing productivity, effective resource allocation, and
rescue government from budgetary burden.
• Privatization has been taken as a means of improving the performance of
public enterprises. In Nepal, privatization efforts were initiated in early
1990s from Sixth Plan.
• It is a part of public sector reform or sectoral adjustment program. In Nepal,
altogether 30 public enterprises have been privatized till the date.
 Privatization policy
• Privatization Policy and Practices in Nepal
• The Privatization Act, 1992 defines privatization as involving private
sector in the management of the enterprise or to sell or lease it or to
transfer government ownership to the private sector or workers, or the
desirous groups either wholly or partially.
• The main features of this act are as follows.
1. Formation of privatization committee: A Privatization Committee
is formed to organize the privatization of enterprises under the
chairmanship of the minister or state minister for finance. The
committee may invite the chief of the enterprise, labour
representatives and any distinguished economist in its meeting.
 Privatization policy
2. Powers, functions and duties of the committee: The
powers, functions and duties of the committee are as follows;
• To recommend, programs and priorities of privatization
• To conduct study or research in order to formulate privatization
programs
• To evaluate the enterprise and recommend to the government
• To remove hindrances faced in privatization programs
• To follow-up the decisions and agreements relating to privatization
• To constitute sub-committees, as may be necessary
• To perform other works, if necessary.
 Privatization policy
3. Process of privatization: The process of privatization has been specified
as under;
• Sale of shares
• Formation of cooperatives.
• Selling assets of the enterprise
• Leasing out the assets of the enterprise
• Involving private sector in the management of the enterprise
• Adopting any other modalities considered appropriate by the
government on the basis of the recommendation of the
 Privatization policy
4. Evaluation of proposal: The proposal of privatization is evaluated on the
following basis;
• Attractive price
• Management of the enterprise without changing its nature
• Retention of the services of present workers and employees
• Enhancement of the employment opportunity
• Managerial experience
• Expansion of the enterprise and business by preparing a good business plan
and making additional investments.
5. Settlement of dispute: If any dispute arises, it is resolved through mutual
consultation among the concerned parties.
 Privatization policy
6.Continuity of the present workers: The Government may ensure the
continuity of service of the present workers of the enterprise to be privatized.
7. Liquidation of enterprise:
• The government can dissolve wholly owned enterprise by publishing a
notification in Nepal Gazette.
• All arrears due to the enterprise liquidated are recovered as government dues.
• The government may transfer the assets and liabilities of the enterprise
liquidated to any other body.
• If all liabilities of the enterprise could not be fully settled from the assets of
enterprise, the residual liabilities can be settled according to existing laws.
Methods of Privatization

Methods of Privatization
• Assets Sales
• Business Sales
• Share Sales
• Management Contract
• Lease Assets
• Others
 Methods of Privatization
• Under this method of privatization, the
production and service units and other assets Asse
of enterprises are transferred to the private
sector in return for a price.
• Assets are sold through public auctions. Some
ts
of the public enterprises in which this method
of privatization was applied along with
Sale
business sales method were
 Bhrikuti Paper Factory,
s
 Harisiddhi Brick and Tile Factory Limited
and
 Bansbari Leather and Shoes Factory
 Methods of Privatization
• This is the transfer of total ownership of a
public enterprise to the private sector.
• It involves transfer of total assets of the Busin
public enterprise to the private sector.
• Some of the public enterprises privatized ess
under this method along with assets sales
method are
Sales
 Bhrikuti Paper Factory,
 Harisiddhi Brick and Tile Factory Limited
and
 Bansbari Leather and Shoes Factory
Limited.
 Methods of Privatization
• This method of privatization involves the transfer of shares to the
general public, employees and private organizations.
• A number of methods may be applied for sale of shares. They are;
• Block sales of shares
 Domestic stock market
 International stock market
• Public offering of the shares
• Sales of shares to employees
• Sales of shares to investment fund
• Combination of the above methods
In Nepal, some of the public enterprises privatized under this method
were Nepal Film Industry Limited, Balaju Textile Industry, Nepal Lube Oil
Limited, and Nepal Telecom Company.
 Methods of Privatization
• Under this method, management rights of
the enterprises are transferred for a
temporary period, in return for a price and
property rights. Managem
• The management company is provided the ent
right of operation and control of the Contract
enterprise.
• The main objective of the management
company is to enhance the efficiency and
productivity of the enterprise.
 Methods of Privatization
• This is transfer of the benefiting rights of the
assets to the private sector known as contractor
for a specific period and in return for a price.
Leas
• The contractor pays a certain fee to the
government against the use of property. e
• This method was used to privatize
• Bhaktapur Brick Factory,
• Lumbini Sugar Factory and
Asse
• Nepal Rozin and Turpentine Limited. ts
 Methods of Privatization
• The other methods of
privatization include
liquidation and renting Othe
rs
Commerce/ trade policy 2015
• Nepal Government has issued new commerce policy, 2015.
• This policy repeal the earlier Commerce Policy, 2008 and help
reduce trade deficit through the utilization of opportunities
provided by world trade system incorporating issues including
developing harmony between Commerce Policy and Nepal
Trade Integration Strategy, enhancing supply related capacity,
increasing production and productivity, protecting and
promoting service, trade and intellectual property, supporting
and mainstreaming trade, making arrangement for monitoring
corporate social responsibility, trade and environment.
Commerce/ trade policy 2015
• Long- Term Vision: "Achieve economic prosperity by enhancing
commerce sector’s contribution to national economy through export
promotion.“
• Goal- To achieve inclusive and sustainable economic growth through
export promotion
• Objectives-
• To enhance supply related capacity, reduce trade deficit by increasing
exports of value added and competitive goods and services
• To increase access of goods, services and intellectual property to the
regional and global markets
 Commerce/ trade policy 2015
Strategies-Strategy to strengthen supply-side capacity, and reduce trade deficit by
increasing exports of value-added competitive products and services in the world market
• Government shall play the role of coordinator, facilitator and regulator to enhance
active participation of the private sector
• Enhance competitive capacity of the products of comparative and competitive
advantage for export promotion.
• Reduce trade deficit by strengthening supply-side capacity.
• Enhance the competitive capacity of exportable service sectors.
• Reduce transaction cost through trade facilitation and institutional strengthening.
• Mainstream trade in order to establish it as a major component of economy.
 Tourism policy 2008
• Tourism Policy 2008 aims to develop tourism as an important sector of
the national economy by developing linkages between tourism and other
sectors
Objectives- The main objectives of tourism policy 2008 are as follows.
• To develop tourism as an important sector of the national economy by developing linkages
between tourism and other sectors.
• To diversify tourism down to rural areas SO as to improve employment opportunities, foreign
currency earnings, growth of national income and regional imbalances.
• To improve natural, cultural and human environments of the nation in order to develop and
expand the tourism industry.
• To maintain a good image of the nation in the international community by providing quality
service and a sense of security and
• To develop and promote Nepal as an attractive tourism destination.
 Tourism policy 2008
Characteristics: The following are some of the notable characteristics
of tourism policy, 2008.
1. Emphasis on promotional activities to attract the tourists in Nepal.
2. Emphasis on Rural Tourism, Community based Tourism and Homestays
3. Priority to internal tourism
4. Diversification, growth, and expansion of tourism through the following:
Business Sports Mountaineeri Casino Trekking Cinema Rafting
tourism tourism ng tourism
Educational Adventure Health Cultural Agricultural Religious
tourism tourism tourism tourism tourism tourism
 Tourism policy 2008
5. Development of air services facilities to the industry
6. Leading role of private sector in tourism 12. Focus on congenial relationship between
development the management and labour
7. Focus on human resource development for 13. Reforms in legal, administrative,
tourism development managerial and structural aspects
8. Emphasis to environmental protection for 14. Provisions of coordination, supervision and
tourism development evaluation.
9. Extensive use of information technology and 15. Formation of Tourism Coordination
data in tourism management Committee, Crisis Management Committee,
10. Focus on tourist security and crisis and
management 16. Activation of Tourism Council (Apex body
11. Recognition to tourism as industry and chaired by the Prime Minister)
 Tourism policy 2008

Policy
• The participation of the private sector will be sought to the maximum extent for development and
diversification of tourism products. The involvement of government will be primarily directed
towards infrastructure development. Apart from this, Nepal government will maintain its role as
coordinator and motivate for the growth of the travel and tourism industries.
• Participation of the Nepalese people in the integrated manner will be carried out for environmental
conservation programs which contribute to sustainable tourism development.
• Existing tourism infrastructure and facilities will be upgraded. Priority will be given to developing
new tourist destinations, particularly in rural areas.
• Popular religious tourism sites will be improved and promoted in order to develop religious tourism.
• Nepal will be developed as a center for adventure tourism.
• Tourist service and facilities will be encouraged to upgrade in quality. Special efforts will be made to
make Nepal a secure place for tourists
 Tourism policy 2008

Policy
• Competitive tourism promotion and marketing will be launched tourist originating
markets to establish Nepal as a major tourist destination.
• Linkages will be established between tourism and agro-based a well as cottage
industries. Emphasis will be placed on developing these related sectors
simultaneously,
• Local investment will be encouraged in service-oriented, travel and trekking agency
businesses in which local investors have proven capability. Foreign investment,
including joint ventures, will be promoted in areas which transfers skills and
technology or in capital intensive industries like hotels and resorts.
• The National Civil Aviation Policy will be implemented as an integral part of Tourism
Policy,
 Monetary policy
• Monetary policy is a macroeconomic policy. It is concerned with monetary
system of a country. It is formulated and implemented by the central bank.
• It involves management of money supply and interest rate. Monetary policy
is used by the government of a country to achieve macroeconomic objectives
like price stability, economic growth, balance of payment stability, full
employment, etc.
• The Objectives of Monetary Policy are as follows;
1. To stabilize the price level since fluctuations in prices bring uncertainty and instability in the
economy
2. To increase investment for full employment
3. To have rapid economic growth with stability
4. To maintain equilibrium in the balance of payments
 Instruments of Monetary
policy
A. Quantitative Instruments: Quantitative instruments affect the level of
aggregate demand through the supply of money, cost of money and availability of
credit. The quantitative instruments of monetary policy are;
1. Bank rate policy: Bank rate refers to the rate of interest levied by central bank to other banks.
Under this, the central bank increases the bank rate during inflationary situation and decreases
in deflationary situation.
2. Open market operation: The open market operation refers to the purchase and/or sale of short
and long term market securities by the central bank. Under inflationary situation, the central
bank sells the securities. On the other hand, it buys securities to address the deflationary
situation.
3. Variation in the reserve ratios: Banks are required to keep a certain proportion of their total
deposit in the form of cash reserves in the central bank. If the reserve ratio is high, banks will be
in a position to create a smaller volume of credit. On contrary, if the ratio is low, they can expand
their credit. The examples are CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio).
 Instruments of Monetary
policy
B. Qualitative Instruments: Qualitative instruments aim at regulating and controlling
the allocation of credit among various users rather than influencing the general
availability of credit. The qualitative instruments of monetary policy are as follows.
1. Fixing margin requirements: The margin refers to the proportion of the loan amount
which is not financed by the bank. A change in a margin implies a change in the loan
size. This method is used to encourage credit supply for the needy sector and
discourage it for other unnecessary sectors.
2. Consumer credit regulation: Under this, the central bank regulates the use of bank
credits by the customers to buy durable consumer goods by influencing the amount
of down payment and the maximum amount of repayment. This can check the credit
use and then inflation in the country.
3. Publicity: Under it, the central bank expresses its views based on facts and figures by
using public media. It influences the credit policy of the commercial banks.
 Instruments of Monetary
policy
4. Credit rationing: Under this, the central bank fixes credit
amount to be lent by the banks. Credit is rationed by limiting the
amount available for each bank or fixing the upper limit of
credit.
5. Moral suasion: It implies the pressure exerted by the central
bank on the overall banking system without any strict action. It
involves persuasion, suggestion, and request to banks.
6. Directives: Under this method, the central bank issue frequent
directives to other banks. These directives guide banks in
framing their lending policy.
 Liberalization / Economic Reforms in
Nepal
• Economic liberalization is the gradual process of lessening government regulations
and restrictions in the economy.
• It advocates greater participation of the private sector in the economic activities. It
also involves combining the economy with rest of the world.
• liberalization is the removal of government controls to encourage economic
development. Most of the countries in the world have pursued the policy of economic
liberalization in the recent decades.
• The goal is to maintain or increase economic competitiveness by encouraging private
sector on a competitive basis by reducing government interference.
• It can be achieved through reducing public expenditures, privatizing government
owned-enterprises, deregulation and de-licensing and curtailing grant and subsidy
provided by the government to different sectors of the economy.
 Liberalization / Economic Reforms
in Nepal
• In Nepal, the liberalization policies were implemented from 1990
with predominant emphasis on privatization and open market
policies.
• After the adoption of these policies, a new industrial policy was
enacted in 1992. It abolished the licensing system giving priority to
the promotion of export oriented industries and subsidies on
fertilizer, essential goods and services were reduced.
• Different acts and policies were promulgated and implemented as
parts of liberalization process. Some of them are Industrial Policy,
1992 and 2010, Foreign Investment Policy, 1992, Labour Act, 1992,
and Tourism Policy, 2008.
 Requirement of Liberalization
• Role of the Government as • Facilitate FDI and
Facilitator Technology Transfer
• Increased Role of Private • Abolishing License
Sector Requirements
• Freedom in Business • Reduction of Tax Rate
Decision • Current Account and Capital
• Simplification of Foreign Account Reform
Trade
• Removal of restriction
 Requirement of Liberalization
Economic liberalization refers to "opening up" a country to rest of the world with
regards to trade, regulations, taxation and other areas that generally affect the
business sector. Liberalization policies require the following.
1. Role of the government as facilitator: Liberalization is a Non-intervenes
approach of development. Hence, the role of the government remains facilitator
not regulator. The government brings policy and structural reforms to facilitate
the private sector It also supports the private sector infrastructure. by building
necessary
2. Increased role of private sector: Economic liberalization emphasizes the
increased role of private sector in the economy. The role of the government
decreases. The assumption is private sector is more agile than the public sector
and has better managerial and decision making capacity. Policies and reforms by
the government focus to development of the private sector.
 Requirement of Liberalization
3. Abolishing license requirements: Liberalization demands
abolishing license requirements in most of the industries. The
Industrial Enterprises Act, has specified only some industries
requiring permission. They are industries related to security,
currency, tobacco. Most of other industries do not require license.
4. Freedom in business decision: Under liberalization,
businesses enjoy freedom in decisions regarding expansion or
contraction of business. The market factors determine price based
on principle of demand and supply. The business sector is free to fix
the price of goods and services.
 Requirement of Liberalization
5.Removal of restriction: Liberalization requires removal of
restriction on the movement of goods and services within and
between countries. It requires elimination of tariff, para-tariff
and non-tariff barriers.
6. Reduction of tax rate: Under liberalization, the government
gradually reduces tax rate to encourage private investment.
7. Simplification of foreign trade: Under liberalization,
foreign trade procedures are simplified through procedural
simplification and facilitation.
 Requirement of Liberalization
8. Facilitate FDI and technology transfer: Liberalization
requires free flow of capital and technology between countries. In
Nepal, Foreign Investment and Technology Transfer policy, 2015
has made several provisions to facilitate FDI and technology
transfer.
9. Current account and capital account reform: Liberalization
requires reform in current and capital market. Current account
reform includes making the foreign exchange convertible. Capital
account reform involves maintaining accounts in convertible
currency.
 Internal & External
Liberalization
• Liberalization may be viewed from two perspectives. They are internal and external
liberalization.
1.Internal liberalization: The internal liberalization in Nepal takes various forms as
mentioned below:
a. Financial sector reforms: The main objective of financial sector reform is to support the
effort of the government to create a sound market oriented financial system for
macroeconomic stability and private sector led economic growth. The financial sector
reform includes the following.
• The banking sector is opened for foreign investment.
• The commercial banks are allowed to accept current and fixed deposits in foreign currency.
• Deregulation of investment rate regime in which the commercial banks are allowed to fix their interest
rate.
• Restructuring of Nepal Bank Limited and Rastriya BanijyaBank.
• Enactment of the NRB Act, 2002, Debt Recover Act, 2002 andBanking and Financial Institution Act, 2006.
 Internal & External
Liberalization
b. Fiscal reforms: These include tax reform, strengthening financial system, deregulation of interest
rate, and convertibility of Nepalese currency. Some of them are,
• Introduction of VAT
• Introduction of export duty drawback and bonded warehouse.
• Private sector is allowed to borrow money from foreign sources.
• Provision of open general license.
c. Monetary policy: Internal liberalization through monetary policies includes;
• Deregulation of interest rate policy.
• Deregulation of foreign exchange rate determination policy.
• Privatization of public owned enterprises.
d. One window policy: One window policy has been brought to provide quick and effective way the
approvals, facilities and other administrative services to industries
e. Removal of subsidies: The government is gradually reducing the subsidies provided to different
sector of the economy.
 Internal & External
Liberalization
f. Public sector reform: The government has the policy of not setting up new public enterprises. It is
focusing on privatization of the public enterprises.
g. Insurance sector reform: The private sector is allowed to open insurance business as a part of
liberalization program.
h. Capital market reform: The foreigners are allowed to invest in the stock exchange. The security
exchange is in the process of privatization.
2. External liberalization: The external liberalization takes the form of reforms in trade sector
and reforms in foreign exchange.
a. Reforms in trade sector: In the early period of 1990, trade policy had been changed from Import
Substitution Industrialization (ISI) policy to export led economic growth strategy. Stringent
restrictive barriers were rationalized.
• Imports were freed to assist export. The reforms in the trade sector were also promoted by the Industrial Act, 1992
(Amended in 2017) and Foreign Investment and Technology Transfer Act, 1992.
• These two acts fully made current account convertible and capital account partially convertible.
 Internal & External
Liberalization
b. Reforms in foreign exchange: It includes current account reform and capital
account reform.
Current account reform: From 1993, foreign exchange has been made fully
convertible. The foreign exchange market is converted to floating system but it is still
pegged with Indian currency. Commercial banks are allowed to keep their balance
abroad.
Capital account reform: Effective from 1991, Nepalese working in international
agencies based in Nepal can keep their account in convertible currencies if they receive
salary in such currency. Similarly Nepalese working abroad also can keep their account
in convertible currency in local bank.
Commercial Banks can provide loan to exporters (related to trade finance) in foreign
exchange and central bank started to refinance area to commercial bank in US currency
from 1998.
 Capital Market Reform
• Capital market also called security market refers • Some of the capital market reforms in Nepal are;
to the part of a financial system concerned with
• Foreigners are allowed to invest in the stock
raising capital by dealing in shares, bonds, and
exchange.
other long-term investments. It plays an important
role in mobilizing savings and channels them into • The NEPSE is in the process of privatization.
productive investments for the development of • There will not be any regulatory intervention in
trade and industry. Hence, it helps in capital pricing of IPO.
formation and economic growth of a country.
• International financial institutions are allowed to
• Securities Board of Nepal (SEBON) was issue local currency.
established by the Government of Nepal on June 7,
1993 as an apex regulator of Securities Markets. It • A fully automated system at NEPSE is
has been regulating the market under the implemented covering trading automation, and
Securities Act, 2006. clearing and settlement automation.
• Develop a compatible system for cross-border
trading/listing to bring investment from foreign
institutional investors and non resident Nepalis.
Factors contributing to competitive
business environment in Nepal
1.Increased Private investment in core business.
2.Rise of financial institutions
3. Increase in FDI
4. Rise of multinationals
5. Development of capital market
6. Changing role of the government
7. Changing marketplace scenario
8. Growing urban population
9. Use of modern technologies
10. Integration to the world economy- BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral
Technical and Economic Cooperation), WTO( World Trade Organization), SAARC (The South
Asian Association for Regional Cooperation).